Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: IMF Aiming to Restore Stability, Rekindle Growth
June 7, 2012
- IMF work program focuses on restoring stability and confidence, reviving growth and jobs
- Critical to swiftly complete borrowing arrangements for enhanced firewall
- Aim to help low-income countries rebuild protective buffers, while supporting development
With the global economy still fragile and risks looming on several fronts, the IMF has drawn up a work program for the next six months aimed at restoring stability and growth, while also making progress on its own governance issues.
Vendors in Sanaa, Yemen: IMF is committed to helping Arab countries successfully manage economic transition (photo: Khaled Abdullah/Reuters)
IMF WORK PROGRAM
The IMF Executive Board’s semiannual discussion of the work program focused on the strategic priorities for the 188-member global institution. Expectations remain high about the IMF’s contribution to resolving the continued crisis in a durable manner, and to building stronger foundations for future growth and stability.
“The commitment to increase Fund resources by over $430 billion on a temporary basis attests to the membership’s willingness to act collectively and decisively to get ahead of the crisis,” IMF Managing Director Christine Lagarde said in presenting the work program to the Executive Board.
IMF Survey, the Fund’s online news magazine, spoke with Siddharth Tiwari, Director of the Strategy, Policy, and Review Department¸ about the IMF’s goals for the next six months, a period that includes a major meeting of the IMF and World Bank in Tokyo next October.
IMF Survey: Recent developments point to the continued fragility of the world economy and the risk of renewed stresses, particularly in Europe, with potentially systemic spillovers. What is the IMF doing to prevent contagion and help underpin the global recovery?
Tiwari: The IMF is acting on several fronts. In Europe, the epicenter of the crisis, it is engaging proactively with members and pan-European institutions in monitoring risks and advising on resolution measures. At the same time, analytical work is under way on ways of achieving credible fiscal adjustment while supporting growth, the scope for structural reforms in promoting jobs, and cross-border bank resolution mechanisms, among others things.
These topics have relevance not just for Europe but also for several other members of the IMF. For countries in crisis, the imperative remains to implement well-designed programs. An upcoming discussion by the IMF Executive Board leading to the review of Fund conditionality should help in drawing early lessons.
There are very important challenges confronting the broader membership, beyond Europe. Supporting the economic stabilization and transformation of Arab countries in transition is one.
Another is understanding the factors underpinning inclusive growth; without jobs and social equity, the gains from adjustment and macroeconomic stabilization can be reversed quickly. Our analysis and policy advice must assist emerging markets and developing countries cope with heightened volatility in commodity prices and capital flows. In low-income countries, a key challenge is to preserve macroeconomic stability and debt sustainability through the rebuilding of policy buffers, while also achieving growth and development objectives.
IMF Survey: The IMF membership has moved swiftly and committed to boost the Fund’s emergency firepower by $430 billion. Why does the Fund need so much money?
Tiwari: As the Managing Director noted in her Action Plan, enhanced global firewalls are key, together with strong policies and regional firewalls, to stemming contagion risks and securing stability. Potential financing needs are high globally, even in an active policy scenario.
Enhanced global firewalls are needed to fill potential financing gaps, protect crisis bystanders, and thereby catalyze confidence, which in turn would make it less likely that the resources are actually deployed.
But the window for action is small. Given the unsettled and volatile environment, it is critical to swiftly complete the borrowing modalities for the enhanced firewall and approve individual agreements. The confidence of the membership in the IMF’s capacity to respond rapidly to potential financing needs is essential more than ever.
IMF Survey: A lot of work has been done on financial sector reform, but recent news shows that bankers are still willing to take huge risks. What is the IMF doing to advance the financial sector reform agenda?
Tiwari: Securing financial stability is one of the Fund’s immediate priorities—both to repair balance sheets and break the vicious cycle among sovereign distress, financial stress, and weak growth and to reform the financial sector and reduce the risk and costs of crises.
The work program envisages continued efforts in these areas, including on the modalities for cross-border resolution of financial institutions, an area where progress is needed urgently, and on the implications of financial sector risks for sovereign debt sustainability.
Leveraging the IMF’s cross-country perspectives, work is also under way on assessing the best practices in stress testing, which is key to ascertaining the resilience of financial institutions, and on identifying cross-cutting issues across Financial Sector Assessment Programs.
IMF Survey: Arab countries in transition are facing serious economic challenges. What is the Fund doing to support change in the Middle East and North Africa?
Tiwari: The IMF is committed to helping Arab countries successfully manage their economic transitions, which are occurring amidst a difficult external environment, through policy advice, technical assistance, and lending, as appropriate.
There have been more than 30 technical assistance missions to six Arab countries in transition covering mostly public financial management issues, which are key to building strong and transparent fiscal institutions. Other areas for technical assistance included tax policy and administration for a more equitable taxation, subsidy reform, banking supervision, and statistics.
Capacity building in all these areas is needed for an inclusive growth agenda. The IMF has also been financially engaged in Yemen through its emergency lending facility, the Rapid Credit Facility, in April 2012, while discussions are ongoing in some other countries.
IMF Survey: Low-income countries have been relatively stable during the global economic crisis. What will the Fund do to help them?
Tiwari: Strong pre-crisis buffers (improved fiscal balances, lower public debt, and enhanced international reserves) were crucial to ensuring the relative stability of low-income countries during the crisis.
The challenge now is to rebuild those buffers, thereby preserving macroeconomic stability and debt sustainability, while achieving their growth and development objectives.
The upcoming review of facilities for low-income countries, following the comprehensive reform three years ago, should help take stock of the experience to date and identify potential refinements to the toolkit.
The Managing Director is attaching great importance to completing the 2009 financing package for low-income countries; to ensure momentum, a bimonthly report will track progress. The longer-term sustainability of the Poverty Reduction and Growth Trust will also be informed by the review of these facilities.
IMF Survey: The IMF is committed to reforming its governance and giving more voice to dynamic emerging markets. When should we expect to see some changes in country representation?
Tiwari: Progress is being made toward implementing the 2010 quota and governance reform. But to meet the goal of implementation by this year’s Annual Meetings in Tokyo, significant further steps are needed, especially with regard to consents of the Board reform amendment.
To drive home the point, there will be monthly monitoring of progress, including by constituency, and further outreach to the authorities.
Changes in country representation formally require acceptance of governance reforms (a voting power threshold of 85 percent) and so it would require a very major effort in legislatures around the world between now and October. In theory, it could also be accomplished through voluntary recomposition of the Executive Board to increase the number of emerging market and developing country chairs.
It is also important to make progress on the quota formula review, and both informal and formal Board meetings are planned.
There will also be a dedicated work stream of Deputies in the International Monetary and Financial Committee that will engage on the issue of quota formula review in August and September to facilitate progress, along with work going on in several other fora.